Chicago's Exelon Corp. HQ

Exelon Corp. analysts project stability of stock despite recent fall

By Kaitlin Schuler

Last year was agood one overall for Exelon Corp. Increased net income and falling stock prices encouraged investors to buy or hold Exelon stock. So it’s no surprise that, going forward, analysts recommend buying or holding shares in the large utility services holding company, pointing to the likely continuation of Exelon’s strong earning potential.

The Chicago-based company provides electricity to customers in Illinois and Pennsylvania through its subsidiaries, including Constellation, Commonwealth Edison and PECO. It also provides gas to customers in Maryland through subsidiary Baltimore Gas & Electric.  The company, according to its website, participates in all aspects of the energy business: power generation, sales, transmission and delivery. Exelon generates power from multiple sources, but 59 percent comes from the company’s nuclear power plants. As the country’s number one provider of zero-carbon nuclear energy, Exelon remains confident of growing earnings.

Revenues are growing steadily. In the nine months ended last Sept. 30 revenues rose 12 percent to $22.7 billion, though earnings slumped 36 percent to $629 million due to one-time charges, particularly concerning investments and taxation. Exelon reports for the full year on Feb. 3.

It must be noted that three of Exelon’s 11 nuclear plants in Illinois face possible closure before 2020. Despite these potential shutdowns, Exelon believes it should be rewarded by policy makers for providing clean, carbon-free energy for the state. Exelon has no plans to create new nuclear power plants, however, due to the economic struggle it currently faces in maintaining its current plants, coupled with the “high capital costs and long lead times” that come with new units, according to the U.S. Energy Information Administration.

Analysts aren’t worried about these potential closures, instead placing high value on the persistence of low oil prices and the effect they have on Exelon’s business.

“While we continue to believe that EXC’s shares do not adequately reflect the underlying value of the nuclear generation fleet, near-term sentiment will likely remain linked to the gas markets,” wrote Wells Fargo analyst Neil Kalton in November.

In the last 52 weeks Exelon stock ranged from $25.46 to $37.99, lingering near the low recently.  Similarly, crude oil has been touching multi-year lows.

Also important is PJM Interconnection LLC’s implementation of new performance standards for generators, set to begin in June 2016. These changes, meant to ensure greater reliability during extreme weather conditions such as the polar vortex, reward large capacity generators like Exelon. However, the changes will likely increase electricity prices as capacity is an included cost for customers, potentially leading to federal re-regulation and capping of market prices.

In their recommendations, analysts account for the low risk that power rates will be capped or regulated again. Exelon has seen its stock drop 25 percent since January 2015, and analysts expect the trend to continue, with 20 rating the shares buy or hold and only one saying sell.

Exelon employees
Exelon employees work to keep the company growing and innovating. (Photo courtesy Exelon Corp.)

“Even though sharp increases in power prices would result in an earnings windfall for Exelon, it could lead politicians and regulators to pursue price caps as they did when markets first deregulated,” said Morningstar sector director Travis Miller. “If market power prices are capped or regulated, Exelon loses its primary profit source.”

Analysts agree that the capping or regulation of prices is unlikely, contributing to their overweight recommendation of Exelon stock.

The company’s pending merger with Pepco Holdings Inc. plays into the analysts’ positive forecast as well, despite debt that would be acquired in that transaction. The takeover by Exelon has been pending for more than 20 months, but Miller said he still has confidence in the merger.

“We expect Exelon will be able to close the deal immediately following approval,” Miller said in a November note, referring to the OK needed from federal regulators, expected in the first quarter this year, a deadline set by the District of Columbia Public Service Commission . “We continue to incorporate in our fair value estimates a 75% probability of the deal closing as proposed,” Miller wrote.

Kalton of Wells Fargo released an updated report on Nov. 16, 2015, informing investors of his increased estimate of earnings-per-share, influenced mainly by the pending acquisition of Pepco and a Cost Management Program being implemented in 2016. The company estimates an EPS increase of 13 to 18 cents from 2016 to 2018, with possible annual cost savings of $300 million to $350 million.

Photo at top: Exelon Corporation, headquartered in Chicago, is predicted to remain stable in coming quarters. (Kaitlin Schuler/MEDILL)